Office markets of Central European capital cities in H1 2013

Warsaw is the largest office market in Central Europe in terms of leasing volumes, existing built stock and development pipeline, according to the latest report on the office markets in the region’s capital cities of Bratislava, Budapest, Prague and Warsaw, published by Cushman & Wakefield. Total office space stock in these four cities stands at over 11.5 million sq m, highlighting their importance as key business locations.

Stock and supply
Warsaw boasted the largest total office stock of more than four million sq m as at the end of June 2013 and this is followed by Budapest in second position with over 3,1 million sq m. Prague’s total office stock is expected to top three million sq m by mid-2014 while Bratislava currently has a built stock of nearly 1,5 million sq m.

New supply in the Central European region reached 198 thousand sq m in H1 2013. Office space under construction at the end of June 2013 equates to over 845 thousand sq m across Central Europe, with Warsaw accounting for almost 448 thousand sq m and Prague for 291 thousand sq m.

Prague is experiencing substantial increase in office construction especially in the city centre (the Prague 1) district, with 77,000 sq m of A class office space under development. This will increase Prague 1’s A class stock by almost 40%. The largest of these projects, Florentinum with 41,000 sq m of office space, will be delivered in 2014.

Jonathan Hallett, Managing Partner of Cushman & Wakefield’s Central European Region, said: “Warsaw and Prague are the dominant markets in Central Europe given the number of projects planned and tenant activity. Greater supply will lead to growing competition among developers who will focus on securing as many pre-lets as possible, while tenants are likely to put more downward pressure on rents and demand better incentives in lease packages. This pressure may ease following the improvement in Europe’s economic conditions in the long term. Budapest has reached stability while Bratislava remains a tenant’s market.”

Leases
According to Cushman & Wakefield H1 2013 leasing volumes in the four Central European capitals totalled nearly 692 thousand sq m. This is up on both the first and second halves of 2012 (CE take-up in H1 2012 was 626 thousand sq m). This highlights rising interest from occupiers who are looking to establish a foothold in the region.
Foreign companies which underpin the majority of the gross take-up levels are using the highly qualified labour pool, lower occupancy costs, good standard of buildings and economic stability to their advantage. The CE region has also been good at attracting a large number of international companies looking to establish their outsourcing centres and which are increasingly providing advanced business services in addition.

Rents
Prime rents in the Central Business Districts of the four Central European capital cities remain stable, with the exception of Warsaw where they fell slightly and currently stand at EUR 25.50/sq m/month. In Prague and Budapest prime space in the top prestigious locations can achieve rents of EUR 21/sq m/month, with Bratislava lower at EUR 15/sq m/month. Rents are at an attractive level when compared with the EUR 112/sq m/month commanded in London’s West End (the world’s most expensive office market according to C&W’s Office Space Across the World 2013 report).

Vacancies
The CE vacancy rate of 14.1% in H1 2013 is above the five-year average and in addition the vacancy rate is forecast to rise further across the region. The vacancy rate is the highest in Budapest at 19.9%, Warsaw has the lowest vacancy at 10.5%.

Investment
Investment activity in the core Central European markets of Poland, Czech Republic, Slovakia, and Hungary saw €1,72 billion invested in H1 2013. Investors preference for the office sector continued, attracting 62.5% of the total volume across the same period.

James Chapman, Partner at Capital Markets Group of Cushman & Wakefield, said: “Warsaw has maintained its top position for total investment volumes so far in 2013 with the largest office deal to date the sale of New City to Hines Global REIT. However, the single largest office deal in Central Europe was actually the sale of The Park in Prague. Investors remain keen to secure best-in-class assets that continue to perform exceptionally well and offer income stability despite the increase in new supply. Therefore, we expect to see significant transactional activity in the office sector in both countries between now and the year-end.”